The battle rages on. Legislators are loath to extend the payroll tax cut when there is no formalized plan in place to reduce government spending. The fact is, American taxpayers will have to absorb the cost of the government’s excess deficit either through more taxation or reduced entitlement programs…or both.
One area getting a good look is the tax-deferred status of employer-sponsored 401(k) contributions. That’s the bad news – and we’ll get that in a bit. But first, some good news.
Spread the Wealth
There is recent evidence that employers are actively supporting worker’s retirement savings by restoring plan contributions that were suspended or reduced since the beginning of 2008. In fact, about 12% of plan sponsors have increased their employee contribution match or added a matching contribution. Many are revamping or adding to their investment options to strengthen performance potential for their plans’ returns.1
Apparently, this resurgence is unprecedented. So much so that the president of the Plan Sponsor Council of America observed that he has “not seen anything like this in 25 years of working with plan sponsors.”
[CLICK HERE to read a press release on the findings of the Plan Sponsor Council of America’s latest survey: 401(k) and Profit Sharing Plan Response to Current Conditions; November 29, 2011.]
More Good News: The Message to Save is Resonating
According to the same survey, about 40% of employer plans reported an increase in plan participation, up from a mere 3.9% increase in 2009.1 And here’s an interesting tidbit: 23% of Gen X (born 1965-1980) and 25% of Gen Y (born 1980s-90s) and are funding both a 401(k) or 403(b) plan and an IRA – compared to only 16% of baby boomers.2
[CLICK HERE to read more about the results of the TD Ameritrade Survey from Reuters.com; December 20, 2011.]
401(k) Contribution Tax Debate
One of the tax issues up for debate is the deductibility of employee 401(k) contributions. If that were to change, 401(k) investments could be taxed both before and after taxes, just like other taxable investments. Chances are this would apply only to new contributions – so any balance already in your plan would be taxed only at distribution.
The proposal has lots of opponents, as you can imagine. The Employee Benefit Research Institute (EBRI) reports that such a move would cause many lower-income workers to either decrease or discontinue contributions altogether. High-income earners wouldn’t be happy about it, either. It is also commonly noted that while the government may generate short term revenue by removing the tax deduction, it would likely see a decrease in long term revenues because lower contributions are likely to yield lower long-term investment returns (and, thus, taxable amounts) when distributions are made in retirement.
Another proposal recommends making employer contributions taxable and replacing the employee current 401(k) deduction with a flat-rate refundable credit (of either 18% or 30%) deposited directly into the employee’s account. This would save money for the government but cost employers more – many may even stop offering a retirement plan as a result.
[CLICK HERE to read “The Next Big Threat to Your 401(k): A Tax Break Shake Up;” at AOL’s DailyFinance.com; September 22, 2011.]
[CLICK HERE to read the Brooking Institution’s proposal to Restructure Retirement Saving Incentives; September 8, 2011.]
One of the advantages defined contribution plans (401k) offer over defined benefit plans (pension) is that Americans are better able to control their investments and their future, rather than depending so much on an employer. If you’d like to explore other ways you can save and invest for retirement with less reliance on the government or your employer, please give us a call.
1 Plan Sponsor Council of America; 401(k) and Profit Sharing Plan Response to Current Conditions; November 29, 2011.
2 TD Ameritrade Survey; December 20, 2011.